Episode 126: What to Do When the Market is Down

Now is not the time to panic. Dawn explains why remaining calm and steady through the market decline is the best approach to protect your long-term savings.

Show transcript:

Welcome to the SimpleMoney Podcast, where we make personal finance less intimidating. I’m Dawn Starks, a financial planner and lover of the simple life. I’m here to talk about money and simplicity. Let’s dive in. This is Episode 126: What to Do When the Market is Down. So it’s March 18th, Wednesday, as I’m recording this and I wrote a blog post on February 29th – well, that was the day I published it, I might have written it the day before – about what to do when the market is down.

And so, of course, since then the market has gone down again, and again, and again. It’s gone up and down, and up and down. And today, unless something changes radically in the next 20 minutes or so, it’s going to be another big down day. So I thought it would be interesting to talk about this blog post because I give some examples in here that are worth exploring. But I’ll have to modify it because obviously new information has happened since February 29th when I put this post up.

So I started off this blog post with a quote that I also included in my weekly SimpleMoney newsletter this morning. And that is by Sir John Templeton. It’s a famous quote, he says, “The four most dangerous words in investing are ‘This time it’s different’.” Now the reason that he said that is that it’s very common for people to think, when the markets are in chaos, that “Oh, this is different. This has never happened before, we’re in new territory” and then that,

of course, generates even more anxiety and stress for people who are invested in the market. And so it’s very important to remember that that is not the case. We have had situations before, maybe not the exact situation that we’re dealing with now, but we have had situations before that have caused the market to have a great deal of turmoil. Now I should preface this by saying that all the comments I’m making about the market have to do with the U.S. stock market. But really most of these are comments that could be applied globally.

So all the global markets are in some manner of chaos now, and so a lot of what I’m about to say is applicable across the board. So what do you do when the stock market is in the tank, so to speak, when the stock market is not behaving and it’s going crazy, and it seems like the world is coming to an end with regard to the economy and life as we know it? Well, the short answer is nothing. Don’t do anything in this moment. And the reason I say that is because the natural reaction, when the market is in chaos,

the natural feeling you’re going to have in your gut is “Whoa, Oh, my gosh, this is horrible. I’ve got to get out. I’ve got to get out before I lose all my money!” It’s very common for people to feel that way. It’s just human nature. You just want to cut your losses. You just want to get out, and “Who cares if I’ve lost money? I don’t want to lose any more money!” But the problem is, that when you panic sell, and you sell out of your investments when they’re down,

especially if they’re down significantly, you’re going to lock in those losses. Right now, as you’re watching your accounts online (which you shouldn’t be doing, if that’s what you’re doing), or if you’re just looking at your statements, or pulling it up at the end of the day, you are seeing paper losses. Just like you’re seeing paper gains, like we had a very strong market in 2019 and you saw lots of gains on your statement. So you shouldn’t be too overjoyed when you have paper gains and you shouldn’t be too distraught when you have paper losses.

So it’s only when you actually sell the investments that you lock in the gain or the loss, as the case may be. So I should interrupt myself here because I should have said at the very beginning that none of this conversation today should be construed as me giving you financial advice. So I have to give you my disclaimer that past performance is no guarantee of future performance, and I am not making recommendations here. I’m trying to educate you as I know it, about how the market works, and the psychology behind it, and why it’s important to remember that a

lot of the market is all about psychology. But of course, investing in anything carries risks, anything. All investments carry some risks. They just carry different risks. So it’s your job to do your homework and not just to listen to the talking heads on television, or the internet, or the SimpleMoney Podcast. Although I like to think that I’m not a crazy talking head, I do have experience. I have been doing this for over – well, not podcasting – but I’ve been managing investments and counseling people on their financial planning for over 20 years.

But you need to do your own homework. Don’t listen to your Uncle Sal who claims that he’s an expert investor, and that he knows how to time the market. Just get professional help when you need it or do your own homework. So there’s my disclaimer, and I’ll say it again at the end, I’m sure. So this natural reaction, this reaction to cut our losses and just get out before it all goes down the tubes is really the wrong answer because you’re going to, you will be a loser,

figuratively and literally, with your investments if you sell out. So what happens is it that people will freak out and they’ll say “I can’t take it anymore! It’s just too stressful, I’m not sleeping!” and they sell when the stocks have declined and then they wait until they think things are back to normal. So they watch the stock market and they feel like they’re going to get back in when things have settled out. But the problem is, is that they wait too long to get back in. And what happens is that, from the low point at which they sold to the point at which they feel comfortable getting back in,

you know, that recovery there, they’ve missed that. And so they locked in the loss on the downside. And then they didn’t get any of the

value regained through the upswing in the market. And so even when they do that, sometimes people will say,

“Oh, gosh, that was really dumb. I shouldn’t have done that. And so next time, I’m not going to do it again!”

But probably, they will. Because if you don’t have the stomach for it, than there are other steps that you need to take,

which we’ll talk about a little bit later. But by doing the panic selling, you’re doing the exact opposite of what successful investors do,

because what you just did by panic selling is you sold low, and then you bought back in high. And you want to do just the opposite,

you want to buy when stocks are low and sell when they’re high. So don’t forget that those values on the paper are just values on the paper.

You’re not losing money on paper. It’s just on paper, you’re not technically losing that money. So try to distract yourself and do other things, and don’t pull that trigger and actually sell those stocks low.

So if you are that person, who has that natural human reaction of wanting to mitigate those losses, you just want to cut your losses and get out,

what should you do? So if you did sell out at some point over the last couple of weeks,

you might consider getting back in now, rather than waiting for the market to rebound. That way, you would likely reduce the amount that you will lose, because stocks are still low and I mean, sincerely,

if you sold out last week, and now stocks are lower still this week, you would actually be buying in lower than where you sold out.

So that would be good. And it’s totally possible that they’ll go lower still. And so you have to be prepared for that.

But you’d just be getting back in there, you would be correcting your mistake to some degree and getting back in,

and then you will capture the rebound when it does happen. And it will happen, people; stocks, over time, go up.

So, yes, they go down sometimes. But they go up, overall, over time. And so we don’t know whether this decline is going to be

a few weeks long, or a few months long. I think it’s really unlikely that it’s going to be a few years long.

The underlying economy was in decent shape going into this, and I think this is a lot of emotion driving the

market movement right now. And so keep in mind that when we have a really sharp downturn in the market,

the rebound tends to also be very sharp up. So you don’t want to miss the rebound,

you don’t want to get out, because you will miss the rebound. What goes down

will go back up. We just don’t know when. You may have to be patient, and that’s hard.

It’s hard for people. So I’m going to give you an example that I put in the blog post, just to give you some numbers with it, and why it matters.

And so I’m going to use account values instead of talking about share prices, because most people don’t think in terms of share prices.

But most people think in terms of dollars in their pocket, or dollars on their statement. So let’s say,

prior to a 10% correction, and I realize that’s much less than what we’ve seen this last two weeks,

but just roll with it, this is the example that I have the numbers for in front of me.

So let’s say your account was worth $100,000 to make a nice, easy round number, and we had a 10% correction.

So now after that correction, that 10% down, your account’s worth $90,000 it’s lost 10%. So, Investor One is the one who can’t handle it,

can’t take the heat. And so, he decides that he’s going to sell the investments to cash and just stop the bleeding.

So now you have 90,000 in cash and you’re feeling pretty good about yourself, because you know, what if the market continues to drop forever

(which I’ll point out has never happened), but you feel happy about it. You feel relieved.

All right? So then there’s Investor Two, which, of course, we’ll make a woman investor, who has more sense than Investor

One. So, Investor Two realizes that the market is, you know, it’s lousy. It’s really crummy right now.

But you remember, that you don’t technically lose the money until you sell, so she sits tight and this requires strong resolve,

right? You have to be really strong and willing to take the stress, and kind of roll along with that stress.

So now, let’s continue this example, right? So after a couple weeks, or maybe a couple months,

the market has improved and it increased 15% from the low point of the correction when Investor One sold sold out.

So Investor One now figures that things are more stable and back to normal. And so he takes his 90,000 and he buys back into the market.

Okay, but the market’s already increased 15% remember, but he buys back into the market. So now his account at that moment is worth 90,000.

Investor Two looks at her statement and realizes that her account is now worth 103,500. Because she rode it out.

It went down 10%, and then it came back up 15%. So by virtue of the fact that she did not sell out,

her account is worth more now than it was previously. So what happened to that $10,000? The difference in Investor One’s account?

Where did it go? Well, it’s permanently lost because he sold out of the market when it was down.

And then he waited too long to get back in the market and missed all of that lovely rebound. And Investor number Two,

on the other hand, really didn’t lose anything technically because she didn’t sell out of the market. She just watched the values drop over some period of time and then also regained their value.

So this is just a simplified example, because I just want people to understand that, you know, well

first of all, 10% down and then 10% back up doesn’t get you back to square. It has to be more than 10%.

It’s closer, I think, it’s a little over 11% that you have to get back up in order to get back square where you were.

So it does take a little bit more than the drop in order to get back up. But the recoveries in the market,

the rebounds in the market, tend to happen rapidly. And so it’s hard to time things and people who say they can time the market are full of it,

first of all, it’s nearly impossible to do that. And a lot of times people will get it right once,

maybe they had just this weird premonition back in January, and they were like, “You know, we just had a really good 2019 and I’m just going to pull my money out of the stock market and sit on the sidelines because I feel like something bad is going to happen.”

And so they do, so they pull their money out, and now they’re sitting on the sidelines. And they’re feeling pretty smug about themselves right about now.

Still, when are they going to get back into the market? Well, they might have thought last week that it was a good time to get back in, because the market had dropped pretty precipitously.

Well, then it went down even more. And so that’s the same type of investor who would have bought back in, thinking that he or she was being,

you know, so smart, and then went on to see further losses. And might have been panic sold out of the market again.

Your best bet is to just hold it. Okay? And it feels irrational, it feels like, “Well,

why would I do that? Why would I just watched my value go down and down and down?” Because it won’t go down forever.

All right. And the people who will say, “Well, this is different, you know, this is a calamity.

This is a completely different situation. We’ve never been in this situation before.” – Yes, we have.

We have not been in this precise situation before, but we have been in situations like this before where the market has gone haywire because of outside sources, or outside reasons,

and it does recover. So that is how we know that long-term investors are successful because they recognize that, over time, the market grows.

So now let’s talk about what to do after the market correction. Which doesn’t seem to be over yet,

we are still having a lot of volatility. So what do we do now? And this is assuming that you haven’t already sold in a panic and that you’re sitting in cash.

So let’s pretend that you are still sitting there watching it, and not doing anything about it and just,

you know, seeing your account value go down. Well, the first thing you want to do is, you want to assess the feelings that you had during this time.

How did you handle it when you saw this market dive bombing? Did you check your accounts obsessively?

Were you calling your advisor all the time? Were you chewing your fingernails off? Or did you just let it ride, because you were confident in the understanding that markets go up and down, and that you know that this too shall pass.

How did you feel during that period of time? Chances are you at least felt some anxiety about it.

But how much did it affect your life? You know, was it causing you to lose sleep? Was it causing you to feel anxious 24 hours a day?

You know, assess where you are on that spectrum. And then the second thing you need to do is consider your risk tolerance.

Because if you were a Nervous Nellie and/or are still being a Nervous Nellie during this time,

perhaps you need to consider whether you have the risk tolerance in order to have as much in the stock market as you do already.

Maybe you need to have less. Maybe you need to cut your stock holdings at some point in the future.

Not today! This would not be a good time, but you might decide that, “You know,

I just can’t handle the heat. And I don’t like feeling stressed and anxious about it. So I’m going to cut back on the amount of stock that I hold, over time.”

So you want to do that in a systematic way. You don’t want to do it in a panic sell.

But over time, like I’ve said, over long periods of time, stocks have proven to be the best growth investments.

But that doesn’t mean anything if you’re losing sleep, or you’re pulling your hair out, or you are

prompted to panic sell, repeatedly. So, and as a side note, that panic selling, like I described in my example with Investor One,

that is the reason why so many people are unsuccessful as investors. You know, you always hear the stories of the Warren Buffets of the world,

and there aren’t many, who have been massively successful as investors. And then you hear, always, about people who are like,

“You know, I tried that stock market investing, and it just wasn’t for me, and I did nothing but lose money.”

Well, chances are, it’s because you kept selling at the wrong times, and then buying back in at the wrong times.

If you buy and hold over time, and you’re systematic about it, and you’re unemotional about it, your money will grow over the long haul.

So if you do have to, if you decide that your risk tolerance is not strong enough to have as much stock in the,

I mean as much stock in your portfolio as you do, what I urge you to do is to downshift the exposure over over a series of months or years.

Not all at once. Okay? You don’t want to panic sell out just because you decided “Well,

I don’t have the risk tolerance anymore.” It would be far, far better if you could decide, “You know,

I have 80% of my portfolio in the stock market right now. I think I need to have only 50% of my portfolio in the stock market,”

for example, and then decide how you’re going to get from 80 to 50. So decreasing that 30%. Maybe you want to do 5% per month, for six months.

Maybe you want to do it over a couple of years. However you work it out, make it unemotional,

make it something that is not you trying to time the market. Pick your plan, your game plan,

and then execute that game plan on schedule. Don’t make it be something that you have to think about.

So another thing you might consider doing is to work with an advisor. Because a lot of times people,

you know, if you’re doing it yourself, a lot of times people feel lonely and they feel like “I don’t really know what to do,

and I don’t have anybody to talk about this.” So this is a good time to think about working with an advisor,

I’ll tell you that we’re – advisers like me – this is how we earn our keep. This is why we are valuable, its to keep people from making bad decisions with their money.

So, if you are in need of having somebody in your corner about it, and you feel like “I just can’t do it myself,

I need to have somebody to talk to,” then think about working with a financial advisor. Now, I know I’m biased, because I am one.

And this is by no means a sales pitch. You can, if you go to the blog post,

I gave you a link to find an advisor if you’d like to work with one.

But I’m not implying that you should work with me or anybody that I’ve worked with, or anything like that.

I’m just saying that having somebody in your corner can be very beneficial to you. Especially if you tend to get nervous.

And you know you need to have stocks in your portfolio in order to get your goals met. Then you want somebody to be able to bounce ideas off of, and talk you off the ledge when you’re feeling like pulling yourself out of the market at a bad time.

Another thing you need to do after this downturn is pat yourself on the back. If you lasted it out,

if you held tight and didn’t sell out of your investments, that’s tough stuff. You should really be pleased with yourself.

Be proud of yourself and recognize that you could feel fear, and still maintain the course, you know, because you know it’s the right thing to do. Now,

what if you did panic sell last week, or even this week or today, or any of the next coming days

as the market volatility is sure to continue? What do you do? Well, you might consider buying back in sooner rather than later,

like I suggested a little bit ago. And then think about what are you going to do to make sure that you don’t panic sell again?

All right, so let’s talk a little bit about what’s next for this market. Because everyone wants to know that.

And of course, you know “I know everything!” No, I don’t. I don’t have a crystal ball.

I don’t have a way of knowing what’s going to happen. But what I will tell you is that,

history does tend to repeat itself. And so we know how markets behave over time. And we know how different things that have impacted the market have resulted in certain types of market behavior.

So let’s talk a little bit about that, because in all the years of managing investments, I know a few things to be true,

and one of them is what I alluded to earlier. And that is that swift declines in the market are frequently followed by a swift recovery,

and my favorite example to give is the market drop that occurred after the terror attacks on 9/11. You know,

by anybody’s measure, that was a major drop after that happened. Because, of course,

you may or may not recall, that they closed down the markets in anticipation of a bad market for a few days.

And then when the markets reopened, the market did drop precipitously. And so what people don’t realize,

though, is that the market recovered to its pre-attack level within thirty days. Only thirty days, a month,

okay, within a month. People don’t know that, or they don’t remember it, or they don’t recognize it, because the stock market in 2001 was down for the year.

But guess what? The stock market was already on a downward trajectory for the year, because we were in a recession.

And so the attack certainly caused a big – on the on the downward slope of the market for the whole year –

there was a big spike down in September, when that happened, but it recovered to its pre-attack levels within thirty days and then continued to be down for the year.

So it would be wrong to say that the attacks caused the market to be down that year, because they actually recovered from the attacks. Because the market moves in different ways.

And so what’s happening in the economy has an impact. Recession, of course, is going to lead to bad markets.

Actually, bad markets lead to recession, they usually are a leading indicator. But there’s also going to be market shocks.

Things that happen, that are “Holy moly!” moments, things that were unexpected. Certainly like this coronavirus outbreak,

it’s being referred to as a black swan event. And people, well, some people say they expected it,

but on the whole, people did not expect it. And so it causes a lot of pandemonium when something unexpected happens.

So, am I saying that the market’s going to recover swiftly after this correction? No, I can’t say that for sure.

If I was that good at knowing how the market was going to move, I would have less gray hair,

and I would probably be living on an island somewhere as a rich woman, but I don’t. But the fact of the matter is, we don’t know how the markets will perform any time.

All we know is what it tends to do, what kind of behavior the market tends to exhibit, depending on what types of things are happening in the environment and the economy.

So we can say, “OK, this is a catastrophe, this coronavirus outbreak, and we’ve never been here before, and we,

you know, here’s what we think’s going to happen. It’s going to tank the market, you know, for years and years and years.”

But we won’t really know until we’re months or years passed it. We’ll be able to look back and say,

“Oh, here’s what the market did, and here’s why we think it did it.” But until then,

we’re just making guesses, right? But what I’m saying is that based on my experience,

this has been a market shock. And so market shocks, with an underlying economy that’s reasonably intact, which it was, here in the United States,

we probably will see some pretty swift recovery, when it finally does. But that doesn’t necessarily mean it will happen fast.

I’m not implying it’s going to happen in 30 days. We don’t know how long the outbreak is going to take to get under control.

So again, I don’t think it will be years, I think it will probably be months that we’ll be looking at volatile market.

So, you’ve gotta buckle your seat belt for the ride! But just hang in there. So, you know,

if you look at charts of the market over the long term, you’ll see that the market goes up over time, over longer periods of time.

Year by year, the market is certainly up and down. But over longer periods of time it goes up.

And so, thinking about that should provide some measure of comfort to you. But the ride between here and there,

you know, over a ten-year period, even a five-year period, most times the market’s up, statistically.

But the ride is never smooth. But that’s okay, that’s part of it, right? If the ride was smooth,

everyone would invest. And then that, of course, would dilute the whole process. So if you’re going to be an investor, and you’re going to invest in stocks, then you’re going to have to develop a measure of an iron stomach,

you’re going to have to just be able to deal with the volatility and not panic sell because that is the sure, surest way to be unsuccessful as an investor.

So those are my comments for today, and I will repeat my disclaimer that I had earlier in the episode that, I have to say that past performance is not ever an indication of future performance,

even though I did say, didn’t I? That history tends to repeat itself? And it does. But I have to tell you,

as a financial professional, that it’s not an indicator, and we never know what will happen. And investing in anything,

stocks, bonds, cash, money in your mattress, there’s all sorts of ways that you can put your money somewhere,

and they all carry some risks. They’re just different risks. So you need to do your own homework, or talk to a professional and get some advice.

And don’t let that advice come from your crazy Uncle Sal, who says he’s an expert investor.

So you need to get somebody who actually knows what they’re doing, or do your own homework and make sure you vet it out.

So that’s it. Those are my comments for today. Hopefully things will settle down so that everybody can have a little bit less anxiety, because there’s certainly plenty going on right now to cause anxiety.

And I hope that you all are taking care of yourselves, and your loved ones, and that you are staying away from watching all of the

market news, and the virus news, and just everything that’s going on. You know, watch enough to get the news that you need,

but please do yourself a favor and find something else to do with your time. Don’t sit there and watch the news scroll, or watch the news on TV, or anywhere,

wherever it is you’re consuming media. Don’t just do that all day, every day. It’s really a recipe for bad health and just really unhappy, unhappiness,

so I don’t suggest that. All right, that’s it for this week. I look forward to talking with you again next week.

Thanks. Thanks for listening. If you enjoy the SimpleMoney Podcast, be sure to subscribe on your favorite podcast player.

We’d love it if you would leave us feedback and a review. And don’t forget to check out my blog at simplemoneypro.com.

There you’ll find dozens of posts about financial issues that matter to you, as well as thought-provoking pieces about simplifying your life.

Bye for now.


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